Bank of Japan chief faces new challenges a year later

Bank of Japan governor Haruhiko Kuroda on Thursday marked his first year in the job, with critics giving a mixed report card on his unprecedented monetary easing programme rippling through the world's number three economy.

Prime Minister Shinzo Abe hand picked the former Asian Development Bank boss to help lead Tokyo's bid to jumpstart growth and reverse years of deflation which held back the once world-beating economy.

Within weeks of stepping into the job on March 20 last year, Kuroda had unleashed a vast asset-buying programme -- similar to the US Federal Reserve's quantitative easing -- which sought to pump huge amounts of money into the financial system.

The move, which sharply weakened the yen, was meant to jerk the economy out of its slumber and create lasting inflation in a country where falling prices had become the norm.

While deflation may sound good for consumers, it means people tend to put off buying in the hope of getting goods cheaper down the road, hurting producers.

The BoJ programme -- a cornerstone of Abe's growth blitz dubbed Abenomics -- was aimed at changing that psychology.

Deflationary "expectations -- a sense that prices would not increase -- became entrenched," Kuroda said in a speech Wednesday.

"In order to escape such a situation, it has become necessary to pursue a policy that quickly and drastically changes people's sense that prices will not increase."

The conservative Abe, who swept to power in late 2012, had openly criticised Kuroda's predecessor Masaaki Shirakawa for not doing enough to stimulate growth, a rare public rebuke that sparked fears the BoJ's independence was under attack.

On Thursday, Kuroda gave some credit to his BoJ predecessors, saying that earlier policy has yielded results "to some extent" during 15 years of deflation. But he added that it "was not sufficient" to keep falling prices from becoming entrenched.

Tokyo's more recent efforts appear to be gaining traction. The weaker yen boosted the profitability of exporters like Toyota and Sony, and set off a 57 percent rally in the Nikkei 225 stock index in 2013, its best annual run in over four decades.

Growth led G7 nations in the first half of last year, although the pace has slowed since, while business confidence remains high and inflation appears to be taking hold.

Recent data showed consumer prices logged their first annual rise for five years in 2013, and land prices are up in major cities for first time since the global financial crisis in 2008. Big firms have also heeded Abe's call for wage hikes.

- Kuroda gets 'high marks' -

"Generally speaking, the market has given high marks to Mr. Kuroda's BoJ, and I agree with the consensus view," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

"There were some who were sceptical about the effectiveness of his massive easing measures, but actually the yen fell while stock prices rallied. This is in sharp contrast to the BoJ's past policies that were often criticised as too little, too late."

Some critics have dismissed the plan as a money printing exercise that will leave Japan in bigger debt. The country already has the heaviest debt burden among rich nations at more than twice the size of the economy, a figure that promises to expand as a rapidly ageing population strains the public purse.

David Beim, a finance professor at New York's Columbia University, cast doubt on whether the BoJ's attempts to pump money into the financial system through reserve-rich commercial banks was having much impact.

"What is in theory supposed to happen is that, as the central bank expands its balance sheet, the commercial banks expand theirs, thereby expanding the money supply... which stimulates the real economy," he said in a recent email to AFP.

"But when commercial banks already have massive excess reserves, this does not happen."

There is also growing scepticism among analysts and even some bank board members about the BoJ's ambitious target to hit 2.0 percent inflation by the end of next year.

A recent poll by Kyodo News showed nearly three-quarters of Japanese people felt no effect from Abe's spending-and-easy-money blitz, as they brace for the first sales take hike since the late nineties.

The tax increase has boosted speculation the BoJ would be forced to further expand its easing plan to protect the economy amid fears consumers will be scared off by higher prices.

"How to deal with market expectations that the BoJ will announce fresh easing is a delicate matter. If the BoJ holds off, that may disappoint markets," Dai-ichi's Shinke said.

"On the other hand, if the bank announces additional easing, that means the current easing programme was not sufficient and that the economy is not living up to the bank's expectations."

kh-pb/ac